The EU should modernise, not step backwards

The new European Commission should focus on the future and how to modernise the economy, not walking back on the green agenda, writes Mats Engström.

Mats Engström is a senior policy fellow at the European Council on Foreign Relations (ECFR).

Europe has to strengthen its competitiveness. This is the message from the European Council and from the newly reappointed Commission President Ursula von der Leyen, who has promised a Clean Industrial Plan during the first hundred days of her next term.

However, diluting other green policies as some parts of business and right-wing parties ask for would be detrimental to such policy aims rather than enhancing EU competitiveness. Instead, the transition to a low-carbon economy should be an important element in modernising the European economy.

Mario Draghi and Enrico Letta have both emphasised the need for modernisation of the economy and for more investment. This can be seen against the backdrop of rapid change in the global economy as well as in technology. As discussed in a recent ECFR policy brief, green industrial policy should have at least a ten-year perspective, like China’s decisions in 2015 that have now resulted in competitive advantages. Innovation must be at the centre.

In this spirit, the forthcoming Clean Industrial Plan should have a broader approach than only supporting current clean tech companies, although that is important. Protecting innovative European companies from unfair competition in fields such as wind and electric vehicles is certainly necessary. But so are the general framework conditions and support for new areas.

The global landscape in green tech, shaped by US-China competition, is not without opportunity for the EU. However, seizing these opportunities requires a strategic approach.

Firstly, the EU and its member states should focus on investing in emerging technologies where European companies still have an edge or the potential to become global leaders. Such areas are for example low carbon steel and cement, power transmission, heat pumps and other energy and resource efficiency technologies.

Since green transitions will affect most parts of the economy, areas such as advanced materials and digitalised industrial production should also be part of such a broader strategy.

This requires, first and foremost, staying the course for the green transition. Not weakening the Fit-for-55 climate package during the upcoming reviews. Companies and investors need certainty.

Second, Europe needs to coordinate its efforts better. Today, we are disadvantaged by diversity. Member states have different views on how to support domestic industry, and some have stronger financial muscles to provide state aid than others.

This has to change. Mario Draghi and Enrico Letta are right in highlighting the need to finance, for example, transboundary infrastructure investments, for example, in electricity grids.

A combination of instruments is necessary. In addition to better capital markets and an increased EU budget, national income from emission trading can be better coordinated for industrial transformation and money to the Innovation and Modernisation fund can be frontloaded by using future emission trading income as collateral.

Member states should increase the capital of the European Investment and increase the size of the InvestEU facility to provide access to risk capital.

Much bigger efforts are also needed for research and development and to close the skills gap. Successful counties in other parts of the world, such as South Korea, invest more than 3% of their GDP in research and innovation.

However, several EU member states have promised over and over again to raise their national R&I spending to 3% of GDP without doing so. At the same time, there is a lack of skills for green and digital transitions.

The next EU budget must include more investment in R&I and in skills, including capacity building such as industrial research institutes. But this should not come without conditions. Among the requirements for future EU regional policy funding should be that member states themselves increase spending for R&I and skills.

There should also be conditionalities in state aid to companies to promote local skills development. In this way, all member states of the EU would be able to benefit better from the necessary green transitions of industry.

There is also a need for well-designed regulation and green procurement to help create lead markets for innovative companies. For example, mandatory minimum levels for low-carbon steel in big infrastructure projects can help the market penetration of such products.

The current push for deregulation can thus be detrimental to competitiveness.

Instead, the EU should continue ambitious policies for climate and other public goods. This creates incentives for innovation and opportunities for start-ups.

Interdependence is a defining feature of today’s world. The European Union cannot become green and competitive on its own. It needs stronger partnerships, including better innovation cooperation with low- and middle-income countries. The next phase of the Global Gateway, and the next framework program for research should have a stronger international dimension.

The new European Commission should focus on the future and how to modernise the economy. This should be reflected in the mission letters to the commissioners as well as in the forthcoming work program. Taking steps backwards on the green agenda is yesterday’s answer to today’s challenge. Europe is not yet too far behind to thrive in the emerging fields of green competitiveness. But if it loses another decade, it perhaps will be.